Seminar for Banco Santander de Chile

Corporate Finance and Derivatives

Prof. Ian Giddy
Office: Stern 9-57. Tel 212-998-0704; Fax 212-995-4220


The workshop will include explanations and discussions of corporate risk management, including the use, valuation, and hedging of currency and interest-rate futures and options, swaps, caps and floors, swaptions and other tools of risk management. Hedging decisions will be linked to corporate financing decisions in the international as well as domestic financial markets. Participants should prepare by reading the materials on these subjects. At the workshop, they will engage in case studies and exercises in the context of financial institutions in an emerging, opening, capital market. We will also see an example of computer-based analysis of risk, using a value-at-risk methodology. All will be tied to modern principles of corporate financial management.


Ian Giddy has taught finance at NYU, Columbia, Wharton, Chicago and abroad for the past nineteen years. He was Director of International Fixed Income Research at Drexel Burnham Lambert from 1986 to 1989. The author of more than fifty articles on international finance, he has served at the International Monetary Fund and the U.S. Treasury and has been a consultant with numerous financial institutions and corporations in the U.S. and abroad. He is the author or co-author of The International Money Market, The Handbook of International Finance, Cases in International Finance Global Financial Markets and The Hudson River Waterway Guide.


For Monday:
  1. Giddy, Global Financial Markets, Ch 16, 12
  2. Smith, "Raising Capital: Theory and Evidence"
  3. Glen and Pinto, "Debt or Equity? How Firms in Developing Countries Choose"
For Tuesday:
  1. Rawls and Smithson, "Strategic Risk Management"
  2. Smith, Smithson and Wilford, "Managing Financial Risk"
  3. Hull, Options, Futures and Other Derivative Instruments, Ch. 5, "Swaps"
  4. Wakeman, "Option-Based Risk Management Tools"
  5. Crowe, "Swaptions: Tailoring Interest Rate Swaps"
For Wednesday:
  1. Giddy, Global Financial Markets, Ch 7, 8
  2. Giddy and Dufey, "The Management of Foreign Exchange Risk"
  3. Bloomberg, "Why Currency Hedging Offers Only Limited Protection"
  4. Lewent and Kearney, "Identifying, Measuring and Hedging Currency Risk at Merck"
  5. JP Morgan, "Introduction to RiskMetrics"


For Monday:
  1. Ban-Pu Coal Company
  2. The Salmon Industry in Chile
  3. A Day in the Life of the Eurobond Market
  4. The Arauco Eurobond
  5. CTC 4% Convertible Subordinated Debentures
  6. Codelco
  7. Metallgesellschaft
  8. Finance Company Berhad
  9. El Proyecto Alcance
For Tuesday:
  1. Case Studies of Corporate Speculative Losses
  2. Hedging a Future Funding Cost at Cerveceria Polar
  3. Liberty Travel
  4. Grupo Zuliano
  5. Mobil Oil's Debt Management
  6. The Vitro Swaption
  7. For Wednesday:
  8. Arauco's 1993 Foreign Exchange Loss
  9. U.S. Semiconductor
  10. Frutas Amazonas
  11. Dell Computer
  12. Citibank: Managing Global Risk
  13. Procter & Gamble's Diff Swap Transaction


Students will be provided with software to assist in corporate valu-at-risk assessment.

Swaptions Negotiation Exercise

Teams representing a bank and its client will negotiate a swap/cap/swaption with one another.

Outline of the Seminar

First Day 08:30-09:00
Introduction to the Seminar


Corporate Finance and International Long-Term Financing Choices

The changing world of bank-client relationships: how bankers in emerging markets must help their clients cope with volatility and take advantage of the world capital market. The implications of the Mexican crisis for Latin American financing.

Principles of Corporate Financing
Corporate Financing Decisions in Theory and Practice The Optimal Capital Structure Financing and Corporate Volatility Financing and Economic Volatility (Mexico, Argentina) Corporate Taxation and Debt Structure in Chile Case Study: "Ban-Pu Coal Company"

10:30-11:00 Break

Principles of Corporate Financing and Hedging Choices
From "How Much Debt?" to "What Kind of Debt?" Long-Term versus Short Term Fixed versus Floating Currency of Denomination Understanding Economic Exposure Application: "The Salmon Industry of Chile"

A Roadmap for Financing Choices
A Simplified Framework for Financing and Hedging Applications to Latin American Companies

13:00-14:30 Lunch


Special Financing Techniques

International Financing Sources
Loans vs Bonds Private Placements vs Public Issues Domestic vs International Case Study: "A Day in the Life of the Eurobond Market"

The International Capital Market
Structure of the Market: Eurocurrencies, Eurobonds and Euroequities Case Study: "The Arauco Eurobond"

Equity-Linked Financing
Convertibles Case Study: "CTC 4% Convertible Subordinated Debentures" Warrant Bonds Equity Index Linked Bonds Guidelines for the use of Equity-Linked Financing Techniques

16:00-16:30 Break

Asset-Backed Financing Techniques
Mechanics of Asset-Based Financing Reasons to Use Asset-Based Financing Case Study: "Finance Company Berhad"

Second Day

Financial Risk Management, Part I


Instruments for Managing Interest-Rate Risk
The Yield Curve, Spot Rates, and Forward Interest Rates Futures, FRAs, Swaps, Commodities and Collars Case Study: "Hedging a Future Funding Cost at Cerveceria Polar" Linkages Among the Instruments Pricing and Credit Risk of the Instruments Case Study of Interest-Rate Risk Management: "Liberty Travel"

10:30-11:00 Break

Swaps and Debt Management Techniques
The Economics of Swaps How Swap Rates Are Determined All-in Swapped Cost of Capital Case Study: "Grupo Zuliano" Valuation and Termination of Swaps

13:00-14:30 Lunch

Option-Based Hedging Techniques
Why Use Option-Based Hedging? Pricing and Quotations of Interest-Rate Options Understanding the Black-Scholes and Binomial Models Application to Caps, Floors and Collars Application of Callable Bonds and Swaptions

16:00-16:30 Break
Option-Based Hedging Techniques (continued)
Negotiation: "The Vitro Swaption"

Third Day

Financial Risk Management, Part II


Currency Risk: The Measurement of Corporate Exposure
Case Study: "Arauco's 1993 Foreign Exchange Loss" Managing Transactions Exposure Translation Exposure: Alternative Methods Economic Exposure Case Study: "U.S. Semiconductor"

10:30-11:00 Break

Using Forwards, Futures and Money Market Hedging
Forward-Exchange Rates, Relative Interest Rates, and Exchange-Rate Expectations Forward Exchange Contracts Money Market Hedging Case Study: "Frutas Amazonas" Forward Hedging vs Money Market Hedging Nontransferability and Reversal of Forward Contracts Currency Futures, Margin and Marking to Market

13:00-14:30 Lunch

Forwards vs Futures vs Options Currency OptionsWho Needs Them? Case Study: "Options Trip" Option Combinations and Put-Call Parity Currency Option Pricing and the Importance of "Implied Volatility" Currency Collars Exotic Options as Hedging Vehicles Futures vs Forwards vs Options: A Roadmap
16:00-16:30 Break

Risk Management
Accrual versus Mark-to-Market Accounting The Value-at-Risk Approach JP Morgan's RiskMetrics Tools Case Study: "Farmco" (computer analysis of currency risk) Performance Evaluation in Risk Management How Should Companies Control the Abuse Of Derivatives In Risk Management?

Review and Summary of the Seminar

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